Markets Price in 80% Chance of Bank of Canada Rate Hike After Macklem's Hawkish Remarks
Interest rate markets are pricing in an approximately 80 per cent probability that the Bank of Canada will raise its benchmark rate by a quarter-point on Oct. 28, driven by Governor Tiff Macklem's warnings about sustained high oil prices and rising inflation expectations, despite easing core inflation measures.
Financial markets have sharply increased their bets that the Bank of Canada will raise its benchmark interest rate at its Oct. 28 decision, with interest rate swap markets pricing in around an 80-per-cent chance of a quarter-point hike, up from roughly 35 per cent on Friday. The central bank has held its policy rate steady at 2.25 per cent for the past year.
The shift in market expectations followed hawkish comments from Bank of Canada Governor Tiff Macklem, who stated that if oil prices stay around US$100, he expects inflation to gradually drift up from 3 per cent. Several Bay Street forecasters changed their Oct. 28 calls from holding rates steady to hiking them following his remarks.
Statistics Canada reported that the annual rate of inflation ticked up to 3.1 per cent in September from 3 per cent the month before, driven by a 6.1-per-cent monthly increase in gasoline prices. The headline inflation number was better than Bay Street forecasters expected, and there were few signs that the energy price shock was spreading to other consumer prices. Excluding energy, the rate of inflation eased to 2.2 per cent from 2.4 per cent the month before, while the Bank of Canada’s two preferred measures of underlying inflation fell to 1.9 per cent and 1.8 per cent. Annual grocery price inflation declined to 1.7 per cent from 2.8 per cent in August, marking the smallest year-over-year grocery price jump since May 2024.
Despite the subdued core inflation data, bond traders are pricing in a high likelihood of a rate hike amid rising inflation expectations. A quarterly consumer survey published Monday showed a sharp uptick in long-term inflation expectations, with individuals worried about the impacts of tariffs and high gasoline prices. Roughly half of firms surveyed said they plan to pass on some or all cost increases related to the war in the Middle East and tariffs to customers over the next 12 months.
Business sentiment shifted after Prime Minister Mark Carney walked away from the trade negotiating table with Washington in late August. Businesses surveyed afterward expected weaker sales and higher inflation. Weak jobs reports and potential U.S. tariffs act as counterweights to inflation risks, creating a difficult decision environment for the Bank of Canada.